I
n 2009 the New York City taxi commission, which regulates cab fares, began an investigation after it found that one cab driver from Brooklyn, Wasim Khalid Cheema, overcharged 574 passengers in just one month. The taxi drivers’ scheme, the commission said, involved 1.8 million rides and cost passengers an average of $4–5 extra per trip. The drivers pressed a button on the taxi’s payment meter that catego- rized the fare as a Code No. 4, which is charged for trips outside the city to Nassau or Westchester and is twice the rate of Code No. 1, which is charged for rides within New York City limits. Passengers can see which rate is being charged by looking at the meter, but few bother to do so; they rely on the cab driver’s honesty.After the commission discovered the fraud, it used GPS data, col- lected in every cab, to review millions of trips within New York City and found that in 36,000 cabs the higher rates were improperly activated at least once; in each of about 3,000 cabs it was done more than 100 times; and 35,558 of the city’s roughly 48,000 drivers had applied the higher rate. This scheme cost New York City riders more than $8 mil- lion plus all the higher tips they paid as a result of the excess charges. The fraud ranks as one of the biggest in the taxi industry’s history, and New York City Mayor Michael R. Bloomberg said criminal charges could be brought against cab drivers.
The commission also demanded that in the future a new digital metering system be introduced to alert passengers, who would have to acknowledge that they accepted the higher rate charge. Also, offi- cials said taxi companies would eventually be forced to use meters based on a GPS system that would automatically set the charge based on the location of the cab, and drivers would no longer be able to manually activate the higher rate—and cheat their customers. In 2011, New York City signed a $1 billion contract with Nissan to supply the next generation of yellow cabs that will be used over the next decade. Each of these cabs will be equipped with the latest GPS tracking and monitoring systems that will make such unethical behavior virtually im- possible; in addition they will also be continually upgraded with the
Organizational Insight 2.4
latest hybrid or electric technology to increase gas mileage, which will also keep fares down.
These three sources of ethics collectively influence the ethics that develop inside an organization, or organizational ethics, which may be defined as the rules or standards used by an organization and its members in their dealings with other stakeholders groups. Each organization has a set of ethics; some of these are unique to an organization and are an important aspect of its culture, a topic discussed in detail in Chapter 7. However, many ethical rules go beyond the boundaries of any individual company. Companies, collectively, are expected to follow ethical and legal rules because of the advantages that are produced for a society and its members when its organizations and institutions behave ethically.
Why Do Ethical Rules Develop?
One of the most important reasons why ethical rules governing action develop is to slow down or temper the pursuit of self-interest. One of the best ways of understanding the self-interest issue is to discuss the “tragedy of the commons” problem. When common
50 PART 1 • THE ORGANIZATION AND ITS ENVIRONMENT
land—that is, land owned by everyone—exists, it is rational for every person to maximize their use of it because it is a free resource. So everybody grazes their cattle on the land to promote their individual interests. But if everybody does this, what happens to the land, the common resource? It is destroyed by erosion because overgrazing leaves it defense- less to the effects of wind and rain. Thus the rational pursuit of individual self-interest re- sults in a collective disaster. The same is true in many organized situations: Left to their own devices, people pursue their own goals at the expense of collective goals.
Ethical laws and rules emerge to control self-interested behavior by individuals and organizations that threatens society’s collective interests. For example, the reason why laws develop to establish what is good or appropriate business practice is because they provide benefits to everybody. Free and fair competition among organizations is only pos- sible when rules and standards exist that constrain the actions people can take in a certain situation. As a businessperson, it is ethical for me to compete with a rival and maybe drive that person out of business if I do so by legal means such as by producing a cheaper, better, or more reliable product. However, it is not ethical for me to do so by shooting that person or by blowing up his factory. Competition by quality or price creates value for the con- sumer; competition by force results in monopoly and hurts the customer and the public in- terest. This is not to say that nobody gets hurt—the rival I force out of business gets hurt— but the harm I do him has to be weighed against the gain to consumers and to myself.
Ethical issues are inherently complex ones where the problem is to distribute the helps and harms between different stakeholders. The issue is to try to act as people of goodwill and to try to follow the moral principles that seem to produce the most good. Ethical rules and moral codes develop to increase the value that can be produced by peo- ple when they interact with each other. They protect people. Without these rules, free and fair competition degenerates into conflict and warfare, and everybody loses. Another way of putting this is to say that ethical rules reduce the costs people have to bear to decide what is right or appropriate. Following an ethical rule avoids expending time and effort in deciding what is the right thing to do. In other words, ethical rules reduce transaction costs between people, that is, the costs of monitoring, negotiating, and enforcing agreements with other people. Transaction costs can be enormous when strangers meet to engage in business. For example, how do I trust the other person to behave ethically when I don’t know that person? It is here again that the power of ethics in establishing the rules to be followed is so important. For if I can rely on the other person to follow the rules, I do not need to expend effort in monitoring the other person to make sure they do perform as they agreed. Monitoring wastes my time and effort and is largely unproductive. So when people share common ethics, it helps reduce transaction costs.
Behavior that follows accepted ethical rules confers a reputation effect on an individ- ual or an organization that also reduces transaction costs. If an organization over time is known for engaging in illegal acts, how will people view that organization? Most likely with suspicion and hostility. However, suppose an organization always follows the rules and is known for its ethical business practices over and above strict legal requirements. It will have gained a reputation, which is valuable because people will want to deal with it. Unethical organizations over time are therefore penalized as people refuse to deal with them, so there are constraints on organizations beyond those of the law.
Reputation effects also help explain why managers and employees who work in or- ganizations also follow ethical rules. Suppose an organization behaves unethically; what will be the position of its employees? To outsiders, employees come to be branded with the same reputation as the unethical organization because they are assumed to have per- formed according to its code of ethics. Even if the organization’s unethical behavior was the product of a few self-seeking individuals, it will affect and harm all employees. For ex- ample, in Japan in the stock crash of the 1990s, many brokerage firms went bankrupt with irate clients suing these firms for disguising the real risks associated with investment in the inflated stock market. Employees of these firms found it very difficult to obtain jobs in other organizations because they were branded with the “shame” of having worked for these companies. Thus employees have the incentive for their firm to behave ethically be- cause their fortunes are tied up with the organization’s—an organization’s bad reputation will hurt their reputation too.30
CHAPTER 2 • STAKEHOLDERS, MANAGERS, AND ETHICS 51
One intangible reward that comes from behaving ethically is feeling good about one’s behavior and enjoying the good conscience that comes with acting within the rules of the game. Success by stealth and deceit does not provide the same intangible reward as success from following the rules simply because it is not a fair test of ability or personal qualities. Personal reputation is the outcome of behaving ethically, and the esteem or re- spect of one’s peers has always been a reward that people desire.
In sum, acting ethically promotes the good of a society and the well-being of its mem- bers. More value is created in societies where people follow ethical rules, and where criminal and unethical behavior are prevented by law and by custom and practice from emerging. Nevertheless, individuals and organizations do perform unethical and illegal acts.
Why Does Unethical Behavior Occur?
Although there are good reasons for individuals and organizations to behave ethically, there are also many reasons why unethical behavior takes place.
PERSONAL ETHICS In theory, people learn ethical principles and moral codes as they mature as individuals in a society. Ethics are obtained from such sources as family and friends, places of worship, education, professional training, and organizations of all kinds. From these, people learn to differentiate right from wrong in a society or in a social group. However, suppose you are the son or daughter of a mobster or an enormously wealthy landed family, and your upbringing and education takes place in such a context. You may come to believe it is ethical to do anything and perform any act, up to and including murder, if it benefits your family’s interests. These are your ethics. These are obviously not the ethics of the wider society and as such are subject to sanction, but in a similar way managers in an organization may come to believe any actions that promote or protect the organization are more important than any harm the organization does to others.
SELF-INTEREST We normally confront ethical issues when we are weighing our personal interests against the effects of our actions on others. Suppose you know you will get a promotion to vice president of your company if you can secure a $100 million contract, but you know to get the contract you must bribe the contract giver with $1 million. What would you do? Your career and future seems to be assured by performing this act, and what harm would it do? Bribery is common anyway, and if you don’t pay the million, you can be sure that somebody else will. So what do you do? Research seems to suggest that people who realize they have most at stake in a career sense or a monetary sense are the ones most likely to act unethically. Similarly, it has been shown that organizations that are doing badly in an economic sense and are struggling to survive are the ones most likely to commit unethical and illegal acts such as collusion, price fixing, or bribery.
OUTSIDE PRESSURE Many studies have shown that the likelihood of a person’s engaging in unethical or criminal behavior is much greater when outside pressure exists for that person to do so. In some organizations, for example, top managers’ desires to increase performance lead them to create reward systems that have the intentional or unintentional effect of making employees act unethically and overcharge consumers. Top managers may feel that they are under similar pressures from shareholders if company performance is deteriorating and so they start to cut corners and make unethical decisions to keep their jobs. If all these pressures work in the same direction, we can easily understand how unethical organizational cultures develop as managers buy into the idea that “the end justifies the means.”
The temptation for organizations collectively to engage in unethical and illegal anti- competitive behavior is very great. Industry competitors can see quite clearly the advan- tages to acting together to raise prices because of the extra profits they will earn. The harm they inflict is much more difficult to see because their customers may number in the millions, and each is affected in such a small way that from the perspective of the compa- nies they are hardly hurt at all. For example, over the last few years, to retain customer goodwill, many companies have adopted the strategy of shrinking the weight of the con- tents of their products rather than raising their prices, because many customers do not bother to check the “price per ounce” that supermarkets are required to report.
52 PART 1 • THE ORGANIZATION AND ITS ENVIRONMENT
The social costs of unethical behavior are very hard to measure. But they can be eas- ily seen over the long run in the form of mismanaged, top-heavy, bureaucratized organi- zations that become less innovative and spend less and less on research and development and more and more on advertising or managerial salaries. When the environment changes and new aggressive competitors arrive the mismanaged company starts to crum- ble and all stakeholders lose.